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Morningstar | Wilmar's 1Q Results Largely in Line, With Mixed Performance; FVE Increased to SGD 3.80

No-moat Wilmar’s first-quarter net profit of USD 257 million was 26% higher year over year, broadly in line with the market's and our expectations. Overall, stronger performance from tropical oils, sugar, and consumer products was partly offset by weaker results in the firm’s crushing business, as well as lower contributions from associates in Africa and China. We leave our earnings estimates unchanged but raise our fair value estimate to SGD 3.80 per share from SGD 3.70 after taking into account the stronger U.S. dollar. At the current share price, we believe Wilmar is fairly valued, given the company’s modest earnings growth outlook. While the firm’s plan to list its China operations by the second half of 2019 could be a catalyst, we think the timetable could be disrupted by ongoing China-U.S. trade frictions.

Pretax profit for the tropical oils segment surged 81% year over year despite lower crude palm oil prices and an 8% fall in fresh fruit bunches production due to unfavorable weather conditions. The strong performance was mainly attributed to the downstream manufacturing and merchandising businesses, which surprised on the upside with sales volume rising 8% year over year and higher margin achieved, more than offsetting the weaknesses in the upstream plantation division.

Although the firm enjoyed higher contributions from the consumer products, rice, and flour milling businesses, pretax profit for the oilseeds and grains division was down 47% year over year, dragged by the weaker earnings from the crushing segment, which was affected by the African swine fever outbreak in China and a sharp drop in Brazilian soybean basis, in line with management guidance in the previous quarter. Management also mentioned that the negative impact was mitigated by reduced crushing activities and timely management of the firm’s soybean position. On a positive note, Wilmar said it expects crushing margins to improve in the second quarter.

While that is encouraging, we think a sustainable recovery will still hinge on the outcome of the China-U.S. trade war, which is still uncertain currently.

The sugar segment was another nice surprise, reporting a pretax profit of USD 1.7 million from loss of USD 39 million a year ago. The robust results were underpinned by stronger performance from refining and merchandising activities. In particular, contributions from Shree Renuka Sugars improved further, in line with the ongoing sugar milling season in India.